ANALYSIS: China’s stock market vola​tility​

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Recent dramatic movements in stock markets have highlighted the differences in terms of volatility between equity investments and real estate. The direct effects on the property market are relatively limited.

The news from our JLL teams around the Asia Pacific region is that so far investors remain attracted to real estate as an alternative to stock markets. As yet we have not seen any major real estate deals fall over due to the stock market gyrations following both June and August equity market fallouts.

Real estate represents a port in a storm for investors

At a time when investors face such uncertainty, the illiquidity of real estate offers respite from the effect of falling prices on portfolios. The stable income streams on longer run lease contracts in real estate assets also reduce volatility in the sector. Price gyrations in the short-run are therefore only determined by cap rates, which have been mostly unchanged over the past six months.

Investors faced with by-the-minute decisions to make on whether to buy, sell or hold stock in the face of constantly changing pricing information can take comfort that the real estate portion of their portfolio is relatively immune from short term price swings.

It is also worth noting that the Chinese government recently relaxed regulations to make it easier for Chinese investors to buy commercial real estate overseas. Given local market volatility and currency movements, overseas investment may increase in attractiveness.

The economic picture in China is mixed

A crash in Chinese stocks does not tell us much about the real economic conditions in China. The limited amount of institutional investment and the absence of international investment mean that the market does not get the level of analysis that others might.

Recent economic data coming from China have been mixed rather than unrelentingly negative as many headlines might suggest. The service PMI (Purchasing Manager Index) hit an 11-month high in July. This is a positive sign that rebalancing towards a more sustainable growth model is underway. Weaker than expected manufacturing PMI did raise justifiable concerns. However the manufacturing PMI has become a less useful guide to conditions in the industrial sector.

There has been much discussion about financial reform in China to ensure a clear path for long-term economic growth. China's policy makers have substantial room to further loosen policy. The lending rate still stands high even after several cuts since last November; fiscal policy can be relaxed too; and based on the budget projections, a sizable boost from government spending is expected in the second half of this year.

However, recent events mean that policy makers will take careful pause in planning future moves to ensure maximum stability.